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Whole Life Insurance

Having life insurance is an important decision, especially for those with dependents relying on their income. However, you may wonder what type of life insurance is right for you. Whole life insurance is just one of many insurance options to consider.  

Whole life insurance is the most basic form of permanent life insurance. Unlike term life insurance, it will give lifelong protection, so long as the policy remains in force. In other words, the policy will lapse if premium payments are missed and the cash value exhausted (we'll discuss the cash value more later on). In exchange for paid premiums, the insurance company will pay out a death benefit in a lump sum once the policyholder has passed away.

Like other permanent insurance choices, whole life insurance comes with a cash value. Many policyholders use this feature for financial liquidity, saving for retirement, or other purposes. Some whole life insurance selections are “participating” policies, which means they receive dividend payments from the life insurance company. “Non-participating” ones are life policies which don’t get dividend payments.

Let’s go into the basics of whole life insurance, its features, and its potential roles in a financial plan.

What is Whole Life Insurance?

Whole life insurance has been around for over 100 years. It is a contract that has insurance and savings components. The insurance industry widely considers it to be the most conservative permanent life insurance policy you can buy.

The insurance part of the policy pays out a preset amount for the death benefit. The savings part includes a cash value. Over time, your premium payments cover the cost of insurance. A portion of them also goes toward the policy cash value. You may pay premiums either as a single payment or at a fixed monthly rate over time.  

The cash value grows in value, on a tax-deferred basis, over time. Once it has reached a suitable amount, you may make withdrawals or borrow against it.

Understanding Whole Life Insurance

Whole life insurance may be attractive for people wanting to use the cash value for various goals. Whole life insurance policies come with a minimum guaranteed growth rate on the cash value component. Some life insurance companies pay dividends, which are a proportion of their financial surpluses, toward whole life policies.

The cash value takes time to grow, often more than 10 years. It is tax-free up to the total sum of premiums paid. People may take money from the cash value via policy withdrawals or loans. But should the insured person on the policy die, outstanding policy loans are subtracted from the death benefit.

Unlike other permanent insurance, a whole life policy comes with a lifetime guarantee for death benefit protection and cash value on your premiums. Because of that, initial premiums for a whole life policy tend to be higher than other life policies.

A Closer Look at Premiums and Insurance Approval Processes

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Depending on the policy, you may have a variety of options for the duration of your premium payments.

  • Deciding upon payments over a shorter duration, in which case the premium payments will be larger than with other choices.
  • Electing for lifelong payments, where most policies go up to when the insured reaches age 100. These payments will be smaller than the above option.
  • In the policies allowing it, choosing lifelong payments, or premiums that are paid for the lifespan of the policy owner.

Among whole life policies with the shorter payment timeline, many contracts have payment durations lasting for 20 years.

Like with other life insurance types, you most likely will undergo medical underwriting for a whole life insurance policy. However, some whole life insurance products provide simpler processes for approval. Those include:

  • Guaranteed issue, where you don’t have any medical exam, health questions, and you will be accepted.
  • Simplified issue, where you have some health questions but no medical exam.

The trade-off for these approval processes is higher cost. Premiums will be higher with these policies than with a fully underwritten one. If cost is a factor, you will want to consider a fully underwritten policy.

But say you have a family history of health issues, or you have been denied standard life insurance due to health challenges. Then the guaranteed or simplified issue approval processes may make sense for you.

Is Whole Life Insurance Right for Me?

If you are weighing whole life insurance versus other options, it’s important to consider your situation and goals. Do you need life insurance for financial security? Are you looking to use whole life insurance for other reasons than lifelong coverage?

Some reasons that people use a whole life policy for include:

  • Building a cash value for big-ticket purchases like a new home, car, or luxury goods
  • For entrepreneurs, using the cash value for business liquidity
  • Providing long-term protection for children or dependents
  • Creating efficient protection for retirement assets
  • Using the policy as a supplemental, tax-deferred wealth-building tool
  • Supplementing other income sources for retirement lifestyle purposes, or during down-market periods
  • Growing people’s money while reducing market risk exposure
  • Providing another safe option to the low interest rates of savings accounts and CDs
  • Creating a tax-efficient legacy transfer for loved ones
  • Meeting estate tax obligations

As you consider your options, be mindful of the risks you seek to manage, financial goals beyond protection (if any), the costs of the insurance, the guarantees of the policy, and the time horizon for which you need the insurance.

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Say you are shopping for life insurance for only financial protection. Then you should consider the duration of how long you will need the coverage. If it’s for a set period, term life insurance may be a better and more affordable alternative. On the other hand, if you are shopping for a lifetime solution, whole life insurance might make sense for you.

Other Factors to Weigh

While premiums for whole life insurance stay level, they are a longer-term commitment. If your income fluctuates from year to year, or much of your income goes toward household budgetary needs and other areas, you may need other life insurance.

Often, life insurance plans come as part of a benefits package. However, for a more permanent option that doesn’t depend on job stability, you will need to choose the right insurance for you. Again, if long-term security is of importance to you, you may want to consider whole life insurance.

Considerations When Purchasing Whole Life Insurance

If you are opting to buy whole life insurance, it’s important to understand the different features and contractual obligations that this implies. The first place to start is identifying the insurance companies from which you are considering a purchase.

The insurer’s financial strength rating and customer service record are extremely important. Consider policy options among sturdy and trustworthy life insurance carriers to ensure that you get the benefits out of your premium payments.

The next step is to shop around for interest-earning opportunities that offer the desired growth potential (if part of your goals). Additionally, you should look at the features and riders that the insurance company policy offers. Some points of interest may include things like a chronic illness rider or a disability waver of premium.

It’s advisable to ask a knowledgeable financial professional or agent for answers you may need.

Need Personal Guidance?

Life insurance offers peace of mind to you and your family. With so many options available, it’s important to make the most appropriate financial decision for your personal situation.

Whole life insurance may be the right choice for a variety of reasons. But they must make sense for your financial picture: your needs, your goals, your situation. It’s prudent to research your options, conduct careful due diligence, and work with a financial professional who guides in your best interest.

Should you need personal attention, financial professionals at SafeMoney.com can help you. Use our “Find a Financial Professional” section to connect with someone directly. If you need a personal referral, call us at 877.476.9723.

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